October 30, 2017 / 2:10 PM / a year ago

Barclays' Modest 3Q17 Returns Weakened by Investment Bank

(The following statement was released by the rating agency) LONDON, October 30 (Fitch) Fitch Ratings expects Barclays' 2017 results to remain weak, if not negative, given fourth quarter pressure from revenue seasonality and additional costs for structural reform, investments and the booking of the UK bank levy. The bank reported a modest 5.1% return on tangible equity (RoTE) for the quarter as the corporate and investment bank (CIB) fared poorly across most segments in an overall challenging quarter for the industry. The RoTE for 9M17 was a low 4.5%, excluding a pre-tax loss of GBP2.5 billion relating to the capital- accretive sale of the African operations. Apart from lower revenue, the quarter's results were also burdened by spending on structural reform, which masked some success in reducing ongoing operational costs. UK customer redress and other litigation expenses, which have been a recurring feature of Barclays' results, were negligible this quarter. Given near completion of its deleveraging programme, improving profitability is key to maintaining the bank's flexibility to manage capital. Management expects that additional cost take-outs, combined with the re-deployment of risk-weighted assets and additional leverage exposure within CIB to help improve revenue, will allow Barclays to progress towards its targets of 9% RoTE in 2019 and 10% in 2020. However, 2018 will likely be weaker, with structural reform and other investment costs, as well as the residual re-integrated non-core components continuing to dampen returns, albeit at lower levels. CIB's 5.9% RoTE in 3Q17 was well below 3Q16's, which had been helped by a non-recurring Brexit-related trading boost. Muted volatility, the effect of the re-integrated non-core components and non-recurrence of 3Q16 treasury gains depressed revenue from fixed income sales and trading where macro income was down 40% yoy and credit 22% yoy. Idiosyncratic weaknesses in the US equity derivatives flow business weighed on equity sales and trading, which was down 24%. Banking fees decreased 6%, impacted by low underwriting activity, though management stated that market shares have improved. The consumer cards and payments division's pre impairment profitability decreased 11% yoy, affected by lower income (from targeting lower-risk clients in the US) and growth-related investments. Impairments increased from higher underlying arrears, and from a one-off charge related to a lower quality portfolio sale completed earlier this year. Excluding the sale-related charge, the loan loss rate was 296bp of net average loans and advances (including banks). Barclays UK's profit before loan impairments and litigation decreased 16%, impacted by the reintegration of the previously non-core ESHLA portfolio, higher operating expenses including for the set-up of the ring-fenced bank and non-recurrence of treasury and other gains in 3Q16. The division's net interest margin decreased to 328bp, including 30bp due to the ESHLA portfolio. Barclays UK did not set aside additional PPI charges this quarter. The division's loan loss rate of 46bp of average net loans, and advances was well below 3Q16's. The net average loan loss rate of 358bp in UK cards is at a cyclical low, having been supported by strong fundamentals of the UK economy, though pressure on affordability for retail borrowers is mounting from slowing GDP and rising inflation. In personal banking the net average loan loss rate remains very low at 18bp. The bank's CET1 ratio was stable compared to 1H17, at 13.1%, which is within the targeted range. Barclays has guided towards a 20bp CET1 ratio decline from the application of IFRS9 (or 40bp without transitional arrangements), which the bank should be able to absorb seamlessly while remaining within the targeted range. Counteracting the impact of IFRS9 is the additional gain in the CET1 ratio from the full regulatory deconsolidation of the Barclays Africa Group Limited (+23bps), roughly half of which it expects to book in 4Q17 with the other half in 2018. The Capital Requirements Regulation leverage ratio was 4.4% and UK leverage ratio 4.9%. The bank expects to increase its leverage exposure by about GBP50 billion, from stepping up financing and macro activity. The impact on the leverage ratio should be fairly low (about 19bp) with everything else being equal. Group liquidity is ample, with the liquidity pool increasing to GBP216 billion and the liquidity coverage ratio to 157%. Contact: Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Ioana Sima Associate Director +44 20 3530 1736 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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